Stephen Long joins Lateline

Economics correspondent Stephen Long talks to Lateline about the moves being taken to deal with the financial market meltdown.

Transcript

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VIRGINIA TRIOLI, PRESENTER: Economics correspondent Stephen Long joins me now to discuss the extraordinary steps being taken right around the world to stop the financial market meltdown. Stephen Long, what do you make of the special fund the US Government is setting up to bail out the banks?

STEPHEN LONG, ECONOMICS CORRESPONDENT: Well, the details are a bit scant at this stage, but it sounds like it's gonna be a huge dumpster for toxic debt. They're in effect saying, Virginia, to the banks in America, "Bring out your debt, give it to us. Any junk that you've got on your books, worthless failed assets that you can't sell, for which there is no market, give it to us, we'll put it in this huge fund." And it sounds, quite possibly, as if they're going to open the Treasury vaults and give them money or Treasury bills in return. It's similar to a scheme that they set up after the last big crisis with banks in the '80s, the savings and loans crisis. But of course, the crisis this time is much, much bigger and the fund, if the reports that are appearing on the wires from informed sources are right, is also going to be much, much bigger. There's talk that it's going to be $US800 billion, a lazy trillion Aussie dollars or so, which is huge, but still not as much as all the toxic debts out there which number at about $US2 trillion.

VIRGINIA TRIOLI: Look, we could talk about the dimensions of this for hours. I guess, the bottom line is is it going to work?

STEPHEN LONG: Well, the immediate question that springs to mind is can the US Government really afford it? It's a huge amount of money and you've got a situation in the US where they have this enormous budget deficit. You're talking $500 billion deficit, $85 billion bail out of the world's biggest insurance company, a couple of hundred billion dollars or more to bail out Fannie Mae and Freddie Mac and now this. I mean, where does it end? And this has to have huge consequences and this will start occurring to people as they think about this in the markets. Immediately, this has to have an effect on the US dollar going forward because if you're setting up a fund like this and you're really creating so much of a deficit in the US, it's gonna drive down the US currency, it's gonna make investors think twice about funding the US deficit and also essentially they're printing money, so that has the potential to be inflationary, although of course if a recession hits then that will mitigate the inflation effects.

VIRGINIA TRIOLI: It's sounding like a kind of Armageddon, really, the way that you bring it all together there.

STEPHEN LONG: Well, I think that, immediately though, it's clearly offered hope and they had no choice but to do this.

VIRGINIA TRIOLI: Yes, that's right.

STEPHEN LONG: The moral hazard arguments aside, because we had a complete lockdown in the credit markets and we were going to have an implosion that would threaten the stability of the entire global financial system if they didn't act with what's this plan: E, F or G?

VIRGINIA TRIOLI: The issue of regulation then has to be the one that's discussed. I mean, they can staunch the wound by doing this, a very expensive way of stopping that blood flow, to continue the metaphor, but then to fix up the system and prevent it happening again, they have to start talking regulation.

STEPHEN LONG: Well, I think that they will be talking wholesale change in the way that the banking sector is regulated in the States and both sides in the Presidential race seem to be saying that. Of course, the question is will they be regulating for the last crisis? We've seen how innovative and creative, in both ways it can be positive and very destructive, these financial institutions can be.

VIRGINIA TRIOLI: And just quickly and finally, will the ban on short-selling achieve a great deal? Will that fix some of the problem too?

STEPHEN LONG: There's been a lot of hysteria about short-selling. And, how can you say that people can't take bets in the markets? It might make some impact in the short run, but I really think that this is a symptom rather than a cause of the problems in the financial markets and that concern is misplaced.